New York – Cogent Consulting, a provider of institutional commission management tools, recently announced that a consortium of leading global institutional broker-dealers have signed a non-binding letter of intent to acquire a majority stake in the company, with definitive documents scheduled to be concluded this summer. According to Robin Hodgkins, President of Cogent Consulting, “This acquisition will help propel Cogent’s products and services into new areas that will all help support the growth of commission management, research valuations, and CSA payments.” The acquisition caps a series of discussions with these brokers that started in 2008 related to Cogent’s position in the commission management space, the capabilities of Cogent’s products, and the creation of industry-standard tools for the management of CSAs/CCAs.
Integrity Research has been following developments in the commission management space; as we argued in our ResearchFocus report on CSAs, there is a strong case to be made for consolidation of CSAs, and widespread consensus among the buy-side that this would be desirable for reasons having to do with convenience, efficiency, and risk-management. The outstanding question came down to who buy-side firms would trust with the management or ownership of a consolidated CSA system: an independent firm, a consortium of broker-dealers, etc.
Cogent has positioned itself well to be a central player in CSAs by developing the technology platform and interfaces necessary to act as a CSA hub: Cogent’s CSA Trak BD “Cloud” system aims to be a standardized platform for clients to access their CSA broker information in one consolidated portal, streamlining operations, reducing staffing requirements, improving payment processing, and viewing broker credits on a virtually aggregated basis. The development of a common communications protocol for trade reconciliation and processing may certainly help to clear many of the headaches that buy-side firms have with existing CSA systems. The backing of several (so far unidentified) major broker-dealers will almost certainly help Cogent to gain increased traction with buy-side firms.
On the other hand, it is not clear that the Cogent solution addresses buy-side concerns about counterparty risk and segregation of CSA funds. CSA users clearly see risk-management and asset segregation as a key requirement for any move towards consolidaton; however, there is no indication that this Cogent/consortium arrangement will lead to CSA funds being held anywhere other than the originating broker dealer. Any CSA-consolidation platform that ignores the very real concerns about counterparty risk may fall short of buy-side customer requirements.
Other questions to consider:
1. Many of the major broker-dealers have spent a considerable amount of time and effort in building their own CSA management systems in order to attract trade-flow from institutional clients. What happens now to those systems? Do they continue to compete with Cogent – a firm they may presumably own in the near future? Are they made obsolete?
2. Who are the members of the consortium? How will the firms left out of the consortium react?
3. Will the consortium members be willing to accept CSA payments made through the Cogent platform for their own research?
Links to the full press release from Cogent and acquistion info are provided below: